If Ohio’s in a budget mess, why is Speaker Batchelder proposing even MORE cuts in Ohio’s revenues?

Speaker Batchelder announced today that his Republican caucus has over 100 bills ready to be introduced and enacted by the new Republican House majority.

Not surprisingly, while the House Republicans wage war on the working and middle class with spending cuts and collective bargaining “reform,” their tax cuts disproportionately favor the wealthiest of Ohioans.

Tax credits businesses that expand operations at abandoned buildings; and

A repeal of the Ohio estate tax.

While a tax credit for Ohio college graduates who stay in Ohio sounds like a good idea, think about it for a second. Why does Ohio need to create a tax incentive to keep young, college educated people from leaving the State? Even though Governor Strickland froze tuition for the first two years of his term and held the line with only modest (low single-digit) increases in the latter half while other States were experiencing double-digit (in Califoria’s case over 30%) increases, Ohio still has a tuition problem. The economic reality is that thanks to annual, nearly, double digit tuition increases over the prior sixteen years of Republican rule, Ohio is an expensive place to send your kid to college. For many families, it’s actually cheaper to send your kid out-of-state in order to get the same quality college education they can get in Ohio.

This has lead to a “brain drain.” Instead of fixing the problem with Ohio’s tuition, this tax credit makes it worse. This tax credit is going to have to be paid for with even more spending cuts. Spending cuts that will likely lead to higher tuition making the prospect of a tax credit that may not even exist anymore by the time you graduate and still doesn’t level the disparity in cost from in-state to out-of-state college education (especially after the resulting tuition increases created to pay for this credit) means this tax credit is an ineffective means to fix the problem. It’s called the Law of Unintended Consequences, Mr. Speaker. This proposal is like using leeches to treat anemia. It would be more effective to use the money this credit would cost to keep tuition down instead.

Although a central plank of the platform for his Recharge Ohio PAC, Governor-elect Kasich barely mentioned his intentions to repeal Ohio’s estate tax at all. It’s somewhat odd that at a time when cities are struggling with their own budget as well, Kasich and the Republican legislative leadership is deciding to remove over $270 million in revenues for the cities and local governments that the estate tax provides. This will lead to either more unemployed Ohioans, or higher local taxes.

And why do we need to eliminate Ohio’s estate tax, Speaker Batchelder?

"It is important that those who have built a business in Ohio from the ground up have the dignity to retire in Ohio without burdening their children and grandchildren with excessive taxes," Batchelder said.

The first estate tax bracket has an effective tax rate of 4.1% through 4.7%. The second has an effective rate of 4.7% and above.

So, if an estate from your rich relative had $500,000 in assets to transfer to you in Ohio, it’d have to pay an effective rate of 4.7% estate taxes first. On the other hand, if you made that much in income instead, that would be subject to an effective rate of 5.4%. In comparison to what such a windfall would be if it were treated as income, is Ohio’s estate tax rate really excessive?

And that doesn’t even cover the reality that like the federal estate tax, the Ohio estate tax is largely avoidable with simple estate planning.

Here’s a hypothetical: Pa Kent owns a family farm in Smallville, Ohio. He wants to leave his successful family farm to his adopted son, Clark, while leaving something for his beloved wife, Martha. The family farm as a business has a fair market value of $500k. Pa Kent is worried, though, how his family is going to come up with the over $23,600 in estate tax he figures they’d have to pay in Ohio’s estate tax, so he goes visit the local estate planning attorney, Lex Luthor.

Lex incorporates Kent Farms and has Pa Kent transfer the title to the farm to the corporate entity. He has Pa and Clark enter into a buy-sell agreement in which Clark agrees to purchase Kent Farms for fair market value. In order to have the funds to pay for the farm, he takes a life insurance policy out on Pa Kent. Pa leaves everything else to Martha once his debts, funeral, and legal expenses are paid for. A few years later, Pa Kent dies. What happens?

Clark Kent becomes the sole owner of a $500k family farm business for the price of whatever he paid in life insurance premiums for the remainder of Pa Kent’s life. The estate accepts the life insurance proceeds from Clark pursuant to the buy-sell agreement. After paying of the estate expenses and Pa Kent’s debts, Ma Kent gets the remainder of the cash proceeds.

And nobody incurs any federal or state tax liability. The estate owes no federal estate tax as the estate is too small to be subject to federal estate taxation. Because all assets of the estate are transferred to the surviving spouse, under existing Ohio law, none of it is taxable for estate tax purposes. The proceeds from the life insurance policy is not treated as income for Clark, either, so it’s not taxed. Instead the proceeds of the policy become the basis value for the family farm Clark now owns which will determine what taxes he might own if he sells it for a profit later.

Clark gets the $500k family farm on the cheap; Martha doesn’t have to worry about money to pay for the funeral; and nobody has to pay any estate taxes. And unlike other Luthor schemes, this one is perfectly legal. Other common estate planning strategies like A-B trusts make it pretty easy to entirely eliminate or minimize estate tax liability.

Which is why the estate tax generates less than half a billion in revenue. However, what revenue it does generate is vital for local governments and cities:

"If the state chooses to repeal that, what we would like to see is some source of revenue that would make up for that money," Ohio Municipal League Deputy Director John Mahoney said. "To just do away with it and pull the rug out from underneath us is unfair."

[Source: Cleveland Plain Dealer 1/3/11]

Ohio doesn’t need to repeal its estate tax. Nor is this the time to ask cities to expect over a quarter of a billion hit in state aid (and that’s before we even get to budget cuts/elimination of the State and Local Government Fund). Such a repeal will have the affect of helping the wealthy while Ohio’s urban centers are forced in more cuts to public safety.

Repealing the estate tax is going to be wildly unpopular with cities like Pepper Pike which have provided a high level of services to citizens partly thanks to this tax. Cities like that benefit in a big way. It’s one more way to hammer municipalities, but if the poorer ones have to suffer, I guess the rich ones should too. It’s make Kasich’s approval rating go down faster and make it easier for Democrats in 2012, if we can get out act together.

Anastasjoy

Repealing the estate tax is going to be wildly unpopular with cities like Pepper Pike which have provided a high level of services to citizens partly thanks to this tax. Cities like that benefit in a big way. It’s one more way to hammer municipalities, but if the poorer ones have to suffer, I guess the rich ones should too. It’s make Kasich’s approval rating go down faster and make it easier for Democrats in 2012, if we can get out act together.

Tax credits to incentivize Ohio grads to stay in Ohio will be to the DETRIMENT of Ohio higher education. The measure of a school’s success is their graduates’ successes OUTSIDE of the home institution and state. If more of our PhD, MD, and JD stay here after graduation, we are less likely to receive training grants, research funding, and overall raise our rating in national standings. This legislation was bipartisian at the beginning, makes great soundbites, but in actuality is BAD for Ohio.

Think about it. Failure to launch is when you stay and mooch off your parents. It may make some sense at the undergraduate level, but defintely, definitely not at the Masters, doctorate, or professional degree levels.

Anonymous

Councilwoman/Blogger Jill Zimon has been pushing her city to budget for zero for the estate tax based on the talk during the campaign of repealing the estate tax. Smart woman.